Succession Planning – Family First OR Business First?

The manufacturing business founded by the parents has been operating for 20 years and although successful is facing growing competition. The parents work in the business with 2 of their 4 children. Parents and children are shareholders of the company.

The parents, in their capacity as directors, have decided to replace some aging manufacturing equipment and to automate the packaging. This will increase production volume and quality, reduce production costs and improve delivery times. Due to the financing costs, no dividends will be declared for 3 years. The good news is that the business will remain competitive and viable.

Each of the children is dealing with her or his stresses and priorities. Daughter B and her husband have just purchased a home in Vancouver which carries a large mortgage. Siblings U and S each have children entering universities in other countries. The tuition and room and board costs are high. T is single and an unemployed mechanical engineer. The children are counting on payment of the dividends. Why should family income be reduced because of the needs of the business?

The standard business approach to problem solving is to say that if the business fails then so does the family. So Business is #1. The children on the other hand have different expectations. They need the money to fulfill their financial obligations and assist their children. Their Family problem will be solved by the business using its cash reserves to make loans to them or buy back some shares. The children’s position is that Family is paramount.

How would you deal with this dilemma – Business First OR Family First? Which is more important? Choose the Business and there are 4 children who are angry at their parents. The parents will defend their decision to strengthen the Business because it is in the best interests of the Family. On the other hand, the children will argue that maintaining Family harmony is vital for the ongoing success of the Business.

Consider an approach that manages the needs of Business AND Family. Managing conflict or contradictions is different from solving a problem. Solving a problem requires focus without reference to any extraneous issue and focus on speed and efficiency. Managing the conflict requires appreciating that Business AND Family are inter-related and dependent upon each other. The managing process is a longer term commitment than is problem solving. Managing the conflict requires addressing all the elements of Business and Family without compromising their respective values, goals and qualities.

The starting point in our example is to make available the resources for Both the Family And the Business that are necessary to address their goals and needs. A financial consultant can work with the Family on budgeting and investing to see if expenses can be reduced and income increased. The in house controller and the outside accountant for the Business can work with management to improve cash flow and adjust the business plan for review with the equipment lender. Communication improves, trust is re-established, and there is a process being developed whose goal is to address the needs of the Business And the Family.

Being a Business Lawyer and Certified Family Business Advisor at Cohen Buchan Edwards LLP, I see the benefits of changing the way we approach complex relationships that exist in the family, management and ownership realms of a Family Business. Consider taking the time to discuss your problem with me and together we can find answers that will address the needs of both your Business And Family. It’s worth the investment, isn’t it?